Personal Tax Tips

Canadian professionals pay a lot of tax, which is why individuals — including shareholders of professional corporations — and members of partnerships are always looking for ways to reduce their annual tax burden. Luckily, there are a number of tax-saving measures that can help with just that. Now is the time to review your 2014 tax situation to see if any apply to you.

Salary, bonus or dividends?

If you’re the owner-manager of a closely-held Canadian-controlled private corporation, you should consider the mix of salary, bonus and dividends in your compensation package. A bonus is often preferred over salary, since the payment can be deferred until after the company’s year-end. You may also opt to receive part of your remuneration in the form of dividends. Certain dividends qualify as “eligible dividends,” which are subject to a lower tax rate than other (regular) dividends.

Where possible, income split with other family members

If you have other family members employed in your business or as shareholders of your professional corporation, there may be significant opportunities to reduce your family’s tax bill. Most professionals in Canada are allowed to have family members as shareholders of a professional corporation, either directly or indirectly (through a family trust). This facilitates income splitting with family members, in the form of dividends. If your corporation can pay dividends to family members with lower incomes, excluding minor children, the tax savings can be considerable.

In addition, if your spouse and/or children work for you, paying them a reasonable salary or bonus will allow you to take advantage of their lower marginal tax rate, and give them earned income for CPP and RRSP purposes.

Acquiring and disposing of assets

In general, if you are planning to purchase an asset to be used in your business you should acquire it before the end of your fiscal year. You will then need to make it “available for use” before year-end should you wish to benefit from the full tax reductions it affords. On the other hand, the disposal of assets that have appreciated in value can create significant income tax liabilities. As such, it is generally recommended that you dispose of an asset at the beginning of the next fiscal period.

Maximize the tax benefits of your capital gains and losses

If you have realized a capital gain in 2014 or in any of the last three years (2011–2014), consider if it makes good investment sense to sell capital property with accrued losses before the end of the year. There are rules that will deny the loss if you sell the property to certain related parties.

Structure your loans and deduct the interest

Interest is deductible for income tax purposes provided that it is paid or payable in the year that there is a legal obligation to pay the interest, and that the interest was incurred on money borrowed to earn business or property income (other than capital gains). Therefore, borrow the maximum amount for business and investment purposes, and as little as possible for personal reasons. For example, if you’re a partner in a partnership and you require funds for personal use, consider withdrawing funds from the partnership and borrowing to reinstate your partnership capital account. The interest paid on the borrowed funds will then be deductible.

Check your instalment requirements

If you’re self-employed or operate your business as a corporation, you may find that your income fluctuates from one year to the next. Instalments are required if the difference between your combined federal and provincial tax, and the amount of tax actually withheld at source, was greater than $3,000 in either 2012 or 2013 and will be greater than $3,000 in 2014. If you’re required to make quarterly tax instalments, you should review your expected 2014 tax liability before remitting your final instalment (which is due December 15, 2014).

Review your sales tax

If you’ve expanded your business and have clients in other provinces, review your requirement to register for other provincial sales taxes. Registration may be required regardless of whether you have a permanent establishment in that province. If you are a GST/HST-registered business that supplies goods or services in more than one province, consult with a sales tax specialist to determine if your systems are correctly collecting the appropriate tax. cce

Kelly Kolke, C.A. is a partner with Grant Thornton LLP. He is based in Nova Scotia. E-mail Kelly.kolke@ca.gt.com.